Volatility and Growth: The Role of Bank Financing in Bolivia

Abstract

The main purpose of the paper is to explain the propagation mechanisms from the credit volatility of banking system. For this, two questions are offered: What determines credit volatility? How does the volatility of bank system affect economic growth? The emphasis is given to a measure of variability of bank credit to the private sector, with differentiated effects between short and long term, by an estimate of one vector corrector error model (VCEM) for the period 1965-2017, based on the Bolivian economy. The results reveal the relevance of aggregate investment as a determinant of credit volatility, since it explains about 1/4 of the variance of bank financing. Therefore, for the first question, the aggregated investment and domestic savings cause credit volatility. Through the approach of one shock of credit volatility, negative fluctuations are generated on the level of savings up to-4%, investment (-3,-5%), trade opening (-2,-3%) and economic growth, between-1 and-5% from the second year to the mid-horizon. Like-wise, the disturbances of the volatility in the credit supply could explain about 25% of the variance of economic growth in the medium time horizon, highlighting the importance in the role of bank financing in Bolivia.